micro economics lecture 03
TRANSCRIPT
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Microeconomics
Lecture 3
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Overview of the Previous
Lecture Scarcity & Choices
Factors of Production
Natural Resources
Labor
Physical Capital Human Capital
Entrepreneurship
Production Possibility Frontier
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Topics Under Discussion
Real Prices vs. Nominal PricesSupply and Demand: Basic Concepts
Market Mechanism
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Real Versus Nominal PricesNominal price is the absolute orcurrent
dollar price of a good or service when itis sold.
Real price is the price relative to an
aggregate measure of prices orconstant dollar price.
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Real Versus Nominal Prices
The Consumer Price Index (CPI) is anaggregate measure.
Real prices are emphasized to permit
the analysis of relative prices.
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Real Versus Nominal PricesCalculating Real Prices
yearcurrent
yearcurrent
yearbasePriceNominalx
CPI
CPIPriceReal
(base year = 100)
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Calculating the Real Price of
Milk
1970 .40 38.8 .40=38.8/38.8x .40
1980 .65 82.4 .31=38.8/82.4x .65
1999 1.05 167.0 .24=38.8/167.0x 1.05
Nominal Price Real Price of MilkYear of Milk CPI in 1970 dollars
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Calculating Real Prices:An Example - Eggs & College
Consumer Price Index
(1983 = 100) 38.8 53.8 82.4 107.6 130.7 163.0
Nominal Prices
Grade A Large Eggs $0.61 $0.77 $0.84 $0.80 $0.98 $1.04
College Education $2,530 $3,403 $4,912 $8,156 $12,800 $19,213
Real Prices ($1970)Grade A Large Eggs $0.61 $0.56 $0.40 $0.29 $0.30 $0.25College Education $2,530 $2,454 $2,313 $2,941 $3,800 $4,573
1970 1975 1980 1985 1990 1998
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Calculating Real Prices:
An Example - Eggs & College
$4,573$19,213x163.0
38.8 Real Price of aCollege Education
1998(1970 = 100)
1.04x163
38.8
EggsofPriceReal19701998 (1970 = 100)
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Supply and DemandThe Supply Curve
The supply curve shows how much of agood producers are willing to sell at agiven price, holding constant other
factors that might affect quantitysupplied
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Supply and DemandThe Supply Curve
This price-quantity relationship can beshown by the equation:
)(PQQ Ss
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Horizontal axis measuresquantity (Q) supplied innumber of units pertime period
Vertical axis measuresprice (P) received
per unit in dollars
Supply and DemandThe Supply
Curve Graphically
Quantity
Price($ per unit)
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Supply and Demand
S
The supply curve slopesupward demonstrating that
at higher prices firms
will increase output
The SupplyCurve Graphically
Quantity
Price($ per unit)
P1
Q1
P2
Q2
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Supply and Demand
Non-price Determining Variables ofSupply
Costs of Production
Labor
Capital
Raw Materials
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Supply and Demand
The cost of rawmaterials falls
At P1, produce
Q2At P2, produce
Q1
Supply curveshifts right to S
More producedat any price onS than on S
PS
Change in Supply
Q
P1
P2
Q1Q0
S
Q2
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Supply and Demand
Supply - A Review
Supply is determined by non-pricesupply-determining variables as suchas the cost of labor, capital, and raw
materials. Changes in supply are shown by
shifting the entire supply curve.
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Supply and Demand
The Demand Curve The demand curve shows how much of
a good consumers are willing to buy asthe price per unit changes holding non-price factors constant.
This price-quantity relationship can beshown by the equation:
(P)QQDD
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Supply and Demand
Quantity
Horizontal axis measuresquantity (Q) demanded innumber of units pertime period
Vertical axis measuresprice (P) paid
per unit in dollars
Price($ per unit)
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Supply and Demand
D
The demand curve slopesdownward demonstratingthat consumers are willing
to buy more at a lower priceas the product becomes
relatively cheaper and theconsumers real income
increases.
Quantity
Price($ per unit)
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Supply and Demand
Non-price Determining Variables ofDemand
Income
Consumer Tastes
Price of Related GoodsSubstitutes
Complements
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DP
QQ1
P2
Q0
P1
D
Q2
Change in Demand
Supply and Demand
Income Increases
At P1, produce Q2At P2, produce Q1
Demand Curve
shifts rightMore purchased at
any price on D
than on D
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Shifts in Supply and Demand
Demand - A Review
Demand is determined by non-pricedemand-determining variables, such
as, income, price of related goods, andtastes.
Changes in demand are shown by
shifting the entire demand curve. Changes in quantity demandedare
shown by movements along the
demand curve.
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The Market Mechanism
Quantity
D
S
The curves intersect atequilibrium, or market-
clearing, price. At P0thequantity supplied is equalto the quantity demanded
at Q0.
P0
Q0
Price($ per unit)
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The Market Mechanism
Quantity
D
S
P0
Q0
If price is above equilibrium:
1) Price is above themarket clearing price
2) Qs > Qd3) Price falls to the
market-clearingprice
P1
Surplus
Price($ per unit)
A Surplus
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The Market Mechanism
The market price is above equilibrium
There is excess supply
Producers lower prices
Quantity demanded increases andquantity supplied decreases
The market continues to adjust until theequilibrium price is reached.
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The Market Mechanism
D
S
Q1
Assume the price is P1 , then:
1) Qs : Q1 > Qd : Q22) Excess supply is Q1:Q2.3) Producers lower price.4) Quantity supplied decreases
and quantity demandedincreases.
5) Equilibrium at P2Q
3
P1
Surplus
Q2 Quantity
Price($ per unit)
P2
Q3
Surplus - Review:
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The Market Mechanism
The market price is above equilibrium:
There is excess supply Producers lower prices
Quantity demanded increases and
quantity supplied decreases The market continues to adjust until
the equilibrium price is reached
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The Market Mechanism
D
S
Q1 Q2
P2
Shortage
Quantity
Price($ per unit)
Assume the price is P2 , then:
1) Qd : Q2 > Qs : Q12) Shortage is Q1:Q2.3) Producers raise price.4) Quantity supplied increases
and quantity demandeddecreases.
5) Equilibrium at P3, Q3
Q3
P3
Shortage
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The Market Mechanism
The market price is below equilibrium:
There is a shortage
Producers raise prices
Quantity demanded decreases and
quantity supplied increases The market continues to adjust until
the new equilibrium price is reached.
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Upcoming Topics
Changes in Market Equilibrium
Elasticities of Supply and Demand
Short Run vs. Long Run Elasticities
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Microeconomics
Lecture 3